Admissibility of ITC in case of Supplier defaulted in GST payment Judicial Analysis of Trendship Online Services Pvt. Ltd. v. Commissioner, Commercial Taxes: A Grim Reminder on ITC Eligibility

"Lex non cogit ad impossibilia" – The law does not compel the impossible.

The recent pronouncement by the Hon'ble Allahabad High Court in Trendship Online Services Pvt. Ltd. v. Commissioner, Commercial Taxes [(2025) 31 Centax 97 (All.)] has reignited the long-standing debate on Section 16(2)(c) of the CGST Act, 2017, particularly focusing on the "actual payment of tax by the supplier to the Government" as a pre-condition for availing input tax credit (ITC).

Legal Framework

Section 16(2)(c):

 “subject to the provisions of section 41 or section 43A, the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation of input tax credit….”

 The Finance Act, 2022 brought significant changes effective 1 October 2022. Section 16(2)(c) was amended to remove the reference to Section 43A (since Section 43A was being omitted).

 Post-amendment, Section 16(2)(c) now reads:

“subject to the provisions of section 41, the tax charged in respect of such supply has been actually paid to the Government…”,

Section 43A Omission – Significance:

The removal of Section 43A by the 2022 amendments was essentially to “do away with two-way communication in return filing. During 2017-2021, the GST system functioned without the envisioned GSTR-2/GSTR-3 matching; instead, forms like GSTR-2A/2B gave recipients information about supplier filings. Tax authorities still invoked Section 16(2)(c) in audits and investigations, often proceeding under Section 74 (fraud) if multiple defaults or fake invoicing was suspected. Some assessees contended that without Section 43A’s procedure being operational, a purchaser should not be faulted solely on supplier default. However, the Finance Act 2022 amendments decisively removed any such argument by providing a clear mechanism in Section 41(2) for reversal and by expunging references to the abandoned matching scheme. In sum, the interpretation post-2022 is anchored in a clear legislative mandate: ITC is conditional, not absolute, and one key condition is the supplier’s payment of tax.

Factual Matrix

Trendship Online Services, engaged in providing soil testing services to the Government of Uttar Pradesh, had procured filter paper from a registered supplier—Shree Radhey International. The purchase, duly supported by a tax invoice, had been paid through banking channels, and the goods were transported personally by the petitioner without third-party logistics.

Despite such diligence, the supplier failed to deposit the GST collected. Subsequently, the tax department denied ITC under Section 16(2)(c), initiating proceedings under Section 74 for wrongful availment of credit. The assessee’s appeal failed before both the adjudicating authority and the Appellate Commissioner, leading to the present writ petition.

 The Court’s Ratio Decidendi

The Hon’ble High Court dismissed the writ, upholding that:

• Section 16(2)(c) mandates actual remittance of tax by the supplier as essential condition for claiming ITC.
• The onus probandi (burden of proof) lies on the Recipient to establish the bona fides and genuineness of the transaction.
• Mere possession of invoice and proof of payment is not sufficient—documentary proof of actual movement of goods, tax deposit, and genuineness of transaction must be established.
• Reference was made to the Apex Court's authoritative ruling in Ecom Gill Coffee Trading Pvt. Ltd., reinforcing the principle that compliance by the supplier cannot be presumed and must be evidenced.

Taxpayers are being penalized for non-compliance by third parties (suppliers), despite their own due diligence and lawful conduct—a position that appears to violate the maxim "actus curiae neminem gravabit" (an act of the court shall prejudice no one) and the foundational premise that no law should compel impossibilities.

The Court has acknowledged that the supplier’s registration was cancelled after the transaction, yet the denial of credit stems from the retrospective failure of the supplier to deposit tax.

1. Due Diligence Is No Longer Sufficient: Even if a buyer pays tax, receives goods, and files returns, ITC can be denied unless the supplier remits tax. This significantly increases compliance risk.
2. Burden of Vigilance Shifts to Buyers: The decision, backed by Ecom Gill, underscores that the entire burden shifts to the buyer—creating a quasi-policing responsibility over suppliers.
3. Legal Uncertainty & Fiscal Injustice: The ruling creates commercial uncertainty where bona fide transactions can result in penal tax liabilities due to third-party defaults—potentially inviting challenge under Article 14 and Article 19(1)(g) of the Constitution for arbitrariness and violation of trade freedoms.

While judicial precedents are binding, they cannot override equity and natural justice. The doctrine of "lex iniusta non est lex" (an unjust law is no law at all) should inspire the Legislature to introduce a safe harbour rule or buyer immunity clause where all bona fide transactions with registered, compliant suppliers are protected—especially if tax payment is proven by banking channels and e-invoicing.

 Conclusion

The Trendship judgment reinforces that Input Tax Credit is not a vested right but a conditional statutory benefit. However, the judgment also exposes a systemic frailty: the inequity in burdening recipients for failures beyond their control.

This decision should galvanize taxpayers to enhance supplier vetting, advocate for policy reforms, and, where necessary, judicially challenge the constitutionality of such provisions under the evolving contours of GST jurisprudence.